How to Spend Your Tax Refund

There are other options besides splurging.

Now that the tax deadline has passed, you probably just want to forget about your taxes until 2018. (I know I do!)  But now is the ideal time to take inventory of your financial situation and move toward your financial goals.

Nearly 80 percent of Americans receive a tax refund, and the average refund is around $2,800. For many households, that’s a significant amount of money, which allows them to get ahead financially or splurge on experiences that otherwise may be out of reach. But before taking the plunge (or making the spend!), it’s important to have an accurate picture of your finances.

“Tax season is the time of year that all of us dive into our personal finances and take stock of what we own and what we owe,” says Onisa Treibs, vice president at Fidelity Investor Center in Southlake, Texas.

“Once you’ve filed your taxes and your finances are still fresh in your mind, [it’s] is the perfect opportunity to take another look at your accounts and see if there are any money moves you can make to save more for retirement, pay down debt, or build up an emergency fund,” Treibs explains.

This may sound like it goes against the conventional idea that most people use their tax refunds to buy something they’ve been pining for. But most Americans in fact report that they’ll use the refund to accomplish longer-term financial goals.

While 16 percent of people surveyed by CBS News report that they’ll spend the money on a splurge, 38 percent say that they’ll use the money to pay down debt, and 40 percent say that they will bolster their savings.

The latter are both good options, Treibs notes, who always recommends that her clients first focus on building up their savings.

“It might seem counterintuitive, but at Fidelity, we recommend setting aside money for an emergency fund as your top priority,” she explains. “That’s because being hit with an unexpected expense could force you into a financial hole, which could take years to climb out of. You never know when you could be hit with a car or home repair — or something even more substantial like an illness or job loss.”

Treibs recommends having three to six months worth of essential living expenses in savings. People who are single and have a solid support network may be comfortable on the lower end of that spectrum, while families, particularly those on a single income, should probably have more in savings for increased stability.

If you’ve already established a hefty savings account, put your refund toward paying down debt, particularly high-interest credit cards. Inquire about all your interest rates and focus on paying down the card with the highest interest rate first.

Some people may be more comfortable both bolstering savings and paying down debt.

“If you can manage to put money towards both your emergency fund and pay down your credit card debt at the same time, that would be the ideal way to ensure you’re protecting yourself against the unexpected, while also improving your debt situation,” Treibs says.

After tax time you should evaluate whether you’re able to increase your retirement contributions, even by just one percent per paycheck. Even such a small amount can help make sure you’re taking advantage of employer incentives, like matching retirement contributions.

“It’s basically free money and will help you save towards your retirement goals,” Treibs says.

Of course, wanting to have fun with your tax refund is completely understandable. Carve out a set amount of your refund for fun and designate the rest to improve your finances.

“While we all love treating ourselves to a splurge purchase, it’s important to balance this by saving or investing some of your tax refund, too,” Treibs notes. “Decide up front what your spend/save split will be — whether it’s 50/50 or 40/60 — and commit to it so you can have your treat and still stay on track with your financial goals.”